Vikas Gupta, CEO and Chief Investment Strategist, OmniScience Capital, is bullish on information stocks, which have been hammered in recent months, as he expects the US Federal Reserve to start cutting interest rates, which will help these companies.
The Fed will begin cutting rates from early 2024 and not the second half of 2024 as is expected, said Gupta who has nearly 20 years of experience in capital markets.
In an interview to Moneycontrol, Gupta said AI play was a must in a portfolio and investors should also keep an eye out for sectors likely to be disrupted by the technology. Edited excerpts:
After the recent US inflation print, the market seems to believe that the Federal Reserve will not go for rate hikes anymore. Do you agree?
We have held the view for a long that the US inflation is consistently declining. The rate hikes work with a lagged effect. So, the initial rapid hikes took some time to reflect the significant decline in inflation numbers.
Note that the numbers have come in below consensus expectations. The market is moving to the view of no more rate hikes and rather a quick pivot to cuts. Even for the pivot, our opinion is that it could be earlier than the consensus view.
We expect the cuts to start happening from early 2024 rather than near H2 2024.
Will the RBI's tightening of the consumer-loan rules have a bigger impact on NBFCs than banks? Do you see any risk?
On the RBI risk weightage, naturally, the retail-oriented NBFCs will be impacted more. Most banks have a more diversified customer profile.
Well, the risks are to the economy in terms of cooling down some consumption. Also, the NBFCs impacted will be forced to slow down on further growth but overall, it will be good in the long run since unsustainable consumption will be brought under control. This would likely have resulted in higher NPAs (non-performing assets) in the future but for the timely RBI action.
Is it the time to buy banking and financial services?
We like the top private banks and public banks too. Also, specialised NBFCs focused on specific infrastructure sectors. We would avoid the heavily consumer-focused overvalued NBFCs.
Are you taking exposure to any of the IPOs that open this week (Tata Technologies, IREDA, Flair Writing, Gandhar Oil Refinery and Fed bank Financial)?
In general, we don’t like IPOs since they are typically priced to favour the existing and exiting shareholders at the cost of the retail investors who invest in the IPO. We like to wait for the good companies to cool down in terms of pricing before investing in them. It could take six months to years before they are priced right to fit into our very stringent discount to intrinsic-value criteria.
What about stocks related to the artificial intelligence (AI) segment, given the growing use of the technology in business?
Yes, we have a specific set of strategies focused on AI since it is going to disrupt all other sectors over the next few decades. Anyone who is not interested in the AI disruptors is likely to see their portfolio companies getting disrupted and that won’t be pleasant for them.
That is why we advise a separate allocation to AI. For investors in INR, we have a portfolio of companies likely to benefit from digital transformation and AI but listed in India. These are mostly Indian IT services companies. For investors willing to invest in USD, we have a portfolio of AI platform companies and others creating the AI ecosystem globally. Most of these are US-listed firms operating globally.
Do you expect a big rally in the technology space in the next calendar year, especially after two years of consolidation? Will the Nifty IT scale new highs?
We are definitely quite optimistic about IT companies. They faced a bear market when the Fed hiked rates in 2022. Now that the Fed is likely to cut rates in 2024, the opposite is likely to happen. Also, they are at a significant discount to their intrinsic values, given the oligopolistic nature of their competence in digital transformation and AI. Also, as mentioned earlier, the expected growth over the next couple of decades in AI is very large.
Should one allot some space for insurance segments (stocks) in a portfolio with a long-term horizon?
Yes, insurance can have an allocation in a portfolio but the companies should be priced right.
Currently, the public sector insurance companies look cheap but they grow slowly, while the private sector grows faster but looks much more expensive. It becomes difficult to say which one is a better investment but if one is alert, some companies are mispriced from time to time and one can then buy them for the long term.
On the other hand, banks, both private and public, look undervalued.
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